UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended:
April 5, 2008
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
to_____
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CUISINE SOLUTIONS, INC.
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(Exact name of registrant as specified in charter)
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DELAWARE
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1-32439
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52-0948383
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(State or other jurisdiction
of incorporation)
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(Commission File Number)
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(IRS Employer
Identification No.)
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85 S. Bragg Street, Suite 600, Alexandria, VA 22312
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(Address of principal executive offices)
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(703) 270-2900
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(Registrant’s Telephone Number, including Area Code)
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934, during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days
Yes
þ
No
¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.:
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Large accelerated filer
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Accelerated filer
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Non-accelerated filer
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Smaller reporting company
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
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No
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Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. The number of shares of the issuer’s Common Stock, $0.01 par value, outstanding as of May 14, 2008 was 17,185,591
TABLE OF CONTENTS
PART I: FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
(unaudited)
CUISINE SOLUTIONS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
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April 5,
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June 30,
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2008
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2007
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ASSETS
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Current assets
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Cash and cash equivalents
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$
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209,000
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$
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546,000
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Trade accounts receivable, net
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8,144,000
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5,864,000
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Inventory, net
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13,357,000
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15,081,000
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Prepaid expenses
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656,000
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521,000
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Accounts receivable, related parties
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12,000
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57,000
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Deferred tax assets, current portion
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605,000
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—
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Other current assets
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525,000
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638,000
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TOTAL CURRENT ASSETS
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23,508,000
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22,707,000
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Fixed assets, net
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14,013,000
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12,520,000
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Deferred tax assets, net
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6,740,000
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7,069,000
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Investments, non-current
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375,000
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375,000
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Restricted cash
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118,000
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66,000
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Other assets
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94,000
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83,000
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TOTAL ASSETS
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$
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44,848,000
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$
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42,820,000
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LIABILITIES AND STOCKHOLDERS' EQUITY
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Current liabilities
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Accounts payable and accrued expenses
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$
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7,809,000
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$
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6,999,000
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Line-of-credit
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2,079,000
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1,811,000
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Accrued payroll and related liabilities
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1,780,000
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2,486,000
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Current portion of long-term debt
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882,000
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777,000
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TOTAL CURRENT LIABILITIES
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12,550,000
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12,073,000
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Long-term debt, less current portion
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5,791,000
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5,523,000
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Asset retirement obligation
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601,000
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499,000
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Deferred rent
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154,000
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100,000
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TOTAL LIABILITIES
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19,096,000
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18,195,000
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Commitments and contingencies
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STOCKHOLDERS’ EQUITY
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Preferred Stock - $.01 par value, 2,000,000 shares authorized, none issued
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—
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—
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Common Stock - $.01 par value, 38,000,000 shares authorized, 17,130,591 and 16,623,191 shares issued and outstanding at April 5, 2008 and June 30, 2007, respectively.
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171,000
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166,000
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Additional paid-in capital
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28,415,000
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27,934,000
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Accumulated deficit
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(4,761,000)
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(4,583,000)
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Accumulated other comprehensive income
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Cumulative translation adjustment
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1,927,000
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1,108,000
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TOTAL STOCKHOLDERS' EQUITY
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25,752,000
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24,625,000
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
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$
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44,848,000
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$
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42,820,000
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See accompanying notes to consolidated condensed financial statements.
3
CUISINE SOLUTIONS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
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Sixteen Weeks Ended
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Forty Weeks Ended
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April 5,
2008
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March 31,
2007
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April 5,
2008
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March 31,
2007
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Net sales
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$
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25,245,000
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$
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23,898,000
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$
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66,463,000
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$
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61,352,000
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Cost of goods sold
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20,294,000
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18,851,000
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53,161,000
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47,353,000
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Gross margin
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4,951,000
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5,047,000
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13,302,000
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13,999,000
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Research and development
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320,000
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290,000
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819,000
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647,000
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Selling and marketing
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2,451,000
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2,378,000
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6,300,000
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6,067,000
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General and administrative
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2,946,000
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1,752,000
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6,421,000
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4,372,000
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(Loss) income before non-operating expense and income taxes
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(766,000)
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627,000
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(238,000)
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2,913,000
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Non-operating income (expense)
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Interest expense
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(149,000)
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(29,000)
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(331,000)
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(168,000)
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Other income, net
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141,000
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11,000
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184,000
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27,000
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Total non-operating expense
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(8,000)
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(18,000)
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(147,000)
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(141,000)
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(Loss) income before income tax
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(774,000)
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609,000
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(385,000)
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2,772,000
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Provision for income tax benefit
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364,000
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7,889,000
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207,000
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7,879,000
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(Loss) income from continuing operations before discontinued operations
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(410,000)
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8,498,000
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(178,000)
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10,651,000
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Discontinued operations
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Net gain from dissolution of CS Norway
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—
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116,000
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—
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116,000
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Net gain from discontinued operations
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—
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116,000
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—
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116,000
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NET (LOSS) INCOME
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$
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(410,000)
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$
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8,614,000
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$
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(178,000)
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$
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10,767,000
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Per common share data
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Basic earnings:
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From continuing operations
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$
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(0.02)
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$
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0.51
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$
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(0.01)
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$
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0.64
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From discontinued operations
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0.00
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0.01
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0.00
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0.01
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Net (loss) income
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$
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(0.02)
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$
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0.52
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$
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(0.01)
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$
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0.65
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Diluted earnings:
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From continuing operations
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$
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(0.02)
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$
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0.46
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$
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(0.01)
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$
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0.58
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From discontinued operations
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0.00
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0.01
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0.00
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0.01
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Net (loss) income
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$
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(0.02)
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$
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0.47
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$
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(0.01)
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$
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0.59
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Weighted average shares outstanding-basic
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16,950,904
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16,471,879
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16,787,866
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16,452,149
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Common stock equivalents
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—
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1,960,536
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—
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1,913,645
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Weighted average shares outstanding-diluted
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16,950,904
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18,432,415
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16,787,866
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18,365,794
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See accompanying notes to consolidated condensed financial statements.
4
CUISINE SOLUTIONS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
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Year to date
Forty weeks ended
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April 5,
2008
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March 31,
2007
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CASH FLOWS FROM OPERATING ACTIVITIES
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Net (loss) income
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$
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(178,000)
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$
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10,767,000
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Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities
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Depreciation and amortization
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1,517,000
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1,101,000
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Allowance for doubtful accounts
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14,000
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(225,000)
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Inventory obsolescence reserve
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309,000
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127,000
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Change in deferred tax assets
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(232,000)
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(7,900,000)
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Stock-based compensation
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59,000
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187,000
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Changes in assets and liabilities, net of effects of non-cash transactions:
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Increase in accounts receivable
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(1,797,000)
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(3,560,000)
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Decrease (increase) in inventory
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2,138,000
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(3,294,000)
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Increase in prepaid expenses
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(111,000)
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(815,000)
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Decrease (increase) in accounts receivable, related parties
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45,000
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(14,000)
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Decrease (increase) in other assets
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179,000
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(164,000)
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Increase in accounts payable and accrued expenses
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247,000
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3,628,000
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Decrease in accrued payroll and related liabilities
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(881,000)
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(187,000)
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Changes in assets and liabilities of discontinued operations
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—
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(123,000)
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Net cash provided by (used in) operating activities
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1,309,000
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(472,000)
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CASH FLOWS FROM INVESTING ACTIVITIES
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Increase in restricted cash
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(53,000)
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(50,000)
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Capital expenditures
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(1,988,000)
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(3,290,000)
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Net cash used in investing activities
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(2,041,000)
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(3,340,000)
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CASH FLOWS FROM FINANCING ACTIVITIES
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Payments on debt
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(734,000)
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(272,000)
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Proceeds from debt
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443,000
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1,035,000
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Net borrowing on line-of-credit
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163,000
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2,000,000
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Proceeds from stock issuance
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427,000
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126,000
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Net cash provided by financing activities
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299,000
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2,889,000
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Net decrease in cash and cash equivalents
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(433,000)
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(923,000)
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Change in cumulative translation adjustment
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96,000
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45,000
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Cash and cash equivalents, beginning of period
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546,000
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2,154,000
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CASH and CASH EQUIVALENTS, END OF PERIOD
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$
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209,000
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$
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1,276,000
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See accompanying notes to consolidated condensed financial statements.
5
CUISINE SOLUTIONS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
April 5, 2008
NOTE 1 - DESCRIPTION OF OPERATIONS
The Company produces and markets premium, fully cooked, frozen and prepared foods to a variety of channels and geographic regions. The Company has manufacturing facilities in the U.S.A. and France and its products are sold primarily to the U.S.A. and European Union business customers in the Food Service, On Board Services, Retail, Military and National Restaurant Chain channels.
NOTE 2 - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements included herein have been prepared by the Company in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”) for reporting on Form 10-Q. Accordingly, certain information and footnote disclosures required for complete consolidated financial statements are not included herein. It is recommended that these unaudited condensed consolidated financial statements be read in conjunction with the audited consolidated financial statements and related notes as reported in the Company’s 2007 Annual Report on Form 10-K as filed with the SEC on September 21, 2007.
In management’s opinion, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the unaudited condensed financial position, results of operations and cash flow at the dates and for the periods presented have been included. The condensed consolidated balance sheet presented at June 30, 2007 has been derived from the financial statements that have been audited by the Company’s independent registered public accounting firm, BDO Seidman, LLP, as indicated in their report incorporated by reference to the Company’s 2007 Annual Report on Form 10-K as filed with the SEC on September 21, 2007. The results of operations for the forty week period ended April 5, 2008 may not be indicative of the results that may be expected for the fiscal year ended June 28, 2008, or any other period within the fiscal year 2008.
NOTE 3 - RECENT ACCOUNTING PRONOUNCEMENTS
In June 2006, the Financial Accounting Standard Board (“FASB”) issued FASB Interpretation (“FIN”) No. 48
Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109
. (“
FIN 48”)
is effective for fiscal years beginning after December 15, 2006. Differences between the amounts recognized in the statements of financial position prior to the adoption of FIN 48 and the amounts recognized after the adoption should be accounted for as a cumulative-effect adjustment recorded to the beginning balance of retained earnings. Effective July 1, 2007, the Company adopted the provisions of FIN 48 and the effect of the adoption was not material.
In December 2007, the FASB issued SFAS No. 141 (Revised),
Business Combinations
(“SFAS 141R”). SFAS 141R clarifies the information that a reporting entity provides in its financial reports about a business combination and it replaces SFAS No. 141. SFAS 141R revises the method of accounting for a number of aspects of business combinations, including acquisition costs, contingencies (including contingent assets, contingent liabilities and contingent purchase price), the impacts of partial and step-acquisitions (including the valuation of net assets attributable to non-acquired minority interests) and post-acquisition exit activities of acquired businesses. SFAS 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. SFAS 141(R) will be effective for the Company during our fiscal year beginning June 28, 2009.
In December 2007, the FASB also issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial Statements
(“SFAS 160”). SFAS 160 requires noncontrolling (minority) interests to be reported as a component of equity on the balance sheet, to include all earnings of a consolidated subsidiary in consolidated results of operations and to treat all transactions between an entity and noncontrolling interest as equity transactions between the parties. SFAS 160 is effective for financial statements issued for fiscal years beginning on or after December 15, 2008 and
6
interim periods within those fiscal years. SFAS 160 will be effective for the Company during our fiscal year beginning June 28, 2009.
In March 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging Activities
(“SFAS 161”). SFAS 161 amends and expands the disclosure requirements of SFAS No. 133 and is intended to provide users of financial statements with an enhanced understanding of (1) how and why an entity uses derivative instruments; (2) how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations; and (3) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. SFAS 161 is effective for the Company beginning June 28, 2009. The Company is currently evaluating the provisions of SFAS 161 to determine the impact on its consolidated financial statements.
NOTE 4 - TRADE ACCOUNTS RECEIVABLE, NET
Trade accounts receivable consisted of:
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April 5, 2008
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June 30, 2007
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Trade accounts receivable
|
$
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8,559,000
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$
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6,237,000
|
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Allowance for doubtful accounts
|
|
(415,000)
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|
(373,000)
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Trade accounts receivable, net
|
$
|
8,144,000
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|
$
|
5,864,000
|
The Company provides allowances for estimated credit losses, product returns and adjustments at a level deemed appropriate to adequately provide for known and inherent risks related to such accounts. The allowances are based on reviews of individual accounts by customer, their financial conditions and other factors that deserve recognition in estimating potential losses. While management uses the best information available in making its determination, the ultimate recovery of recorded accounts and other receivables is also dependent on future economic and other conditions that may be beyond management’s control.
NOTE 5 - INVENTORY, NET
Inventory consisted of the following:
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April 5, 2008
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June 30, 2007
|
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Raw material
|
$
|
4,937,000
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$
|
4,626,000
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Frozen product & other finished goods
|
|
7,913,000
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|
9,722,000
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Packaging
|
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1,081,000
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|
989,000
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13,931,000
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15,337,000
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Less obsolescence reserve
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(574,000)
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(256,000)
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Inventory, net
|
$
|
13,357,000
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$
|
15,081,000
|
7
NOTE 6 - DEBT
Debt, at April 5, 2008 and June 30, 2007 was as follows:
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Description
|
|
Maturity
|
|
April 5,
2008
Principal
Outstanding
In Foreign
Currency
|
|
Interest
Rates
|
|
April 5,
2008
Principal
Outstanding
|
|
June 30,
2007
Principal
Outstanding
|
|
Term Loan
|
|
22-Oct-12
|
|
101,000€
|
|
5.70%
|
|
$
|
158,000
|
|
$
|
155,000
|
|
Term Loan
|
|
3-Jun-08
|
|
10,000€
|
|
3.30%
|
|
|
16,000
|
|
|
81,000
|
|
Term Loan
|
|
15-Jun-08
|
|
4,000€
|
|
4.00%
|
|
|
6,000
|
|
|
20,000
|
|
Term Loan
|
|
20-Jun-10
|
|
30,000€
|
|
3.80%
|
|
|
47,000
|
|
|
54,000
|
|
Term Loan
|
|
28-Nov-12
|
|
196,000€
|
|
2.80%
|
|
|
308,000
|
|
|
304,000
|
|
Term Loan
|
|
12-Jun-19
|
|
1,833,000€
|
|
3.60%
|
|
|
2,881,000
|
|
|
2,560,000
|
|
Term Loan
|
|
23-Oct-13
|
|
511,000€
|
|
3.80%
|
|
|
803,000
|
|
|
766,000
|
|
Term Loan
|
|
1-Mar-15
|
|
308,000€
|
|
4.30%
|
|
|
484,000
|
|
|
—
|
|
Line of Credit
|
|
Jun-08
|
|
761,000€
|
|
5.2% - 5.5%
|
|
|
1,195,000
|
|
|
—
|
|
Term Loan
|
|
5-Jun-12
|
|
|
|
7.00%
|
|
|
1,474,000
|
|
|
1,718,000
|
|
Term Loan
|
|
5-Oct-10
|
|
|
|
7.30%
|
|
|
381,000
|
|
|
490,000
|
|
Term Loan
|
|
15-Mar-10
|
|
|
|
6.80%
|
|
|
88,000
|
|
|
118,000
|
|
Line of Credit
|
|
15-Jun-09
|
|
|
|
LIBOR+2.25%
|
|
|
884,000
|
|
|
1,811,000
|
|
Capital Lease
|
|
18-Sep-08
|
|
|
|
19.40%
|
|
|
3,000
|
|
|
6,000
|
|
Capital Lease
|
|
31-Dec-11
|
|
|
|
8.40%
|
|
|
24,000
|
|
|
28,000
|
|
|
|
|
|
|
|
Total
|
|
$
|
8,752,000
|
|
$
|
8,111,000
|
|
|
|
|
|
Less: current portion
|
|
|
2,961,000
|
|
|
2,588,000
|
|
|
|
|
|
Non-current portion
|
|
$
|
5,791,000
|
|
$
|
5,523,000
|
From time to time, the Company enters into separate term loans to purchase new equipment and for improvement projects. As of April 5, 2008, the total principal balance of all these term loans was $8,752,000 of which $5,898,000 was denominated in Euros in the amount of 3,754,000€. These loans bear interest rates ranging from 2.8% to 7.3% and have maturity dates ranging from June 3, 2008 to June 12, 2019. The loans are typically secured by the related equipment.
As of April 5, 2008, the total loan balance under capital leases was $27,000. These loans bear interest rates ranging from 8.4% to 19.4% and have maturity dates ranging from September 18, 2008 to December 31, 2011.
NOTE 7 - INCOME TAXES
The Company’s effective tax rate of 53.8% for the forty weeks ended April 5, 2008 increased 13.8% from 40.0% for the forty weeks ended March 31, 2007. The increase in the effective rate resulted from the reversal of our tax valuation reserve in the third quarter of fiscal year 2007; however, the Company still retains its net operating loss carryforward of $13,970,000 at June 30, 2007 for U.S. Federal and state income tax purposes and does not expect to pay any taxes in fiscal year 2008. Effective July 1, 2007 the Company adopted the provisions of FIN 48 and the effect of the adoption was not material.
NOTE 8 - STOCKHOLDERS’ EQUITY
Effective June 26, 2005, the Company adopted the fair value recognition provisions of SFAS No. 123(R),
Share-Based Payment
(“SFAS 123(R)”), using the modified prospective-transition method. Under that transition method, compensation cost recognized in the fiscal year 2006 includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of June 25, 2005, based on the grant date fair value estimated in accordance with the original provision of SFAS 123 and (b) compensation cost for all share-based payments granted subsequent to June 25, 2005, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123(R). As a result, a non-cash charge of $59,000 and $187,000 were charged to compensation expense during the forty week
8
period ended April 5, 2008 and March 31, 2007, respectively. The Company allocated share-based compensation expense under SFAS 123(R) in the unaudited condensed consolidated statements of income as follows:
|
|
|
|
|
|
|
|
|
Forty weeks ended
|
|
|
April 5, 2008
|
|
March 31, 2007
|
|
Cost of goods sold
|
$
|
—
|
|
$
|
26,000
|
|
Selling and marketing
|
|
—
|
|
|
62,000
|
|
General and administrative
|
|
59,000
|
|
|
99,000
|
|
|
|
59,000
|
|
|
187,000
|
|
Income tax benefit
|
|
(24,000)
|
|
|
(71,000)
|
|
Total share-base compensation, net of tax benefits
|
$
|
35,000
|
|
$
|
116,000
|
During the forty week periods ended April 5, 2008 and March 31, 2007, the Company granted zero and 72,401 stock options, respectively. Options exercised during the first three quarters of fiscal year 2008 and 2007 were 507,400 and 98,350, with an intrinsic value of $3,794,000 and $592,000, respectively.
As of April 5, 2008, the total unrecognized estimated compensation cost related to non-vested stock options granted prior to that date was $112,000, which is expected to be recognized over a weighted average period of 2 years.
NOTE 9 - EARNINGS PER SHARE
Basic earnings per common share are computed using the weighted-average number of shares outstanding during the period. Diluted earnings per common share are computed using the weighted-average number of shares outstanding during the period, plus the incremental shares outstanding assuming the exercise of diluted stock options. Anti-dilutive options of 30,000 and 15,000 were not included in the computation for the first three quarters of fiscal year 2008 and 2007, respectively.
NOTE 10 - TRANSACTIONS WITH RELATED PARTIES
The Company’s 10% equity investment in Cuisine Solutions Chile for $375,000 is accounted for under the cost method as the Company does not have the ability to exercise significant influence over the operating or financial policy of Cuisine Solutions Chile. During the first three quarters of fiscal year 2008 and 2007, the Company purchased $3,860,000 and $4,362,000, respectively, of products from Cuisine Solutions Chile for resale in the U.S. and Europe. The balance owed by the Company to Cuisine Solutions Chile as of the third quarter of fiscal year 2008 and 2007 were $676,000 and $2,069,000, respectively and recorded to accounts payable.
The Company’s line-of-credit with Branch Banking and Trust Company (“BB&T”), with a maximum borrowing amount of $6.0 million and a maturity date of June 15, 2010, is guaranteed by Food Investors Corporation (“FIC”), an affiliate of the Company and it is secured by real estate owned by FIC. The Company has agreed to pay compensation for FIC’s guarantee from FIC of 1.5% of the maximum borrowing amount, or $90,000 per year, which is payable quarterly.
9
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
All statements contained herein, other than historical facts, may constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements may relate to, among other things, future events or our future performance or financial condition. In some cases, you can identify forward-looking statements by terminology such as “may,” “might,” “believe,” “will,” “provided,” “anticipate,” “estimate,” “future,” “could,” “project,” “growth,” “ “intend,” “expect,” “should,” “would,” “if,” “possible,” “potential,” “likely” or the negative of such terms or comparable terminology. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others: (1) a significant change of our relationship with our customers in channels where concentration of sales to a certain number of customers exists; (2) the impact on our profitability from the fluctuations in the availability and cost of raw materials; (3) the impact on our reported earnings from fluctuations in currency exchange rates, particularly the Euro; and (4) those factors listed under the caption “risk factors” of this Report and the Annual Report on Form 10-K as filed with the SEC on September 21, 2007. We caution readers not to place undue reliance on any such forward-looking statements, which are made pursuant to the Private Securities Litigation Reform Act of 1995 and, as such, speak only as of the date made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, after the date of this Form 10-Q.
The following analysis of our financial condition and results of operations should be read in conjunction with our financial statements and the notes thereto contained elsewhere in this report.
BUSINESS OVERVIEW
We produce and market premium, fully cooked, frozen and prepared foods to a variety of channels and geographic regions. We believe that we are recognized in the market place as having the highest quality frozen food product line in the world. Our motto is: exceptional food - ultimate convenience.
We currently distribute products through the following sales channels:
·
On Board Services: Airlines, railroad and cruise lines.
·
Foodservice: Hotel banquets, convention centers, sport stadiums and other special events such as the Olympics.
·
Retail: Supermarket in-store deli and premium frozen packaged foods.
·
Military: Naval carriers, Army field feeding and military dining halls and clubs.
·
National Restaurant Chain: Casual dining multi-unit restaurants.
We utilize the “
sous vide
” technology and methods, which means that the products are vacuum sealed and then slowly cooked in water at very low temperatures. The
sous vide
technology involves knowing the precise time and temperature that food changes molecular structure during cooking. This enables us to cook the food for optimum taste, color and texture while also pasteurizing. Since the products are immediately flash-frozen, there is no need for preservatives in the product and most of our products have a guaranteed 18 month shelf life.
CRITICAL ACCOUNTING ESTIMATES AND POLICIES
Our accounting policies, which are in compliance with U.S. GAAP, require us to apply methodologies, estimates and judgments that have a significant impact on the results we report in our financial statements. In our 2007 Annual Report on Form 10-K, we have discussed those material policies that we believe are critical and require the use of complex judgment in their application. There were no material changes to the policies during the fiscal quarter ended April 5, 2008.
RESULTS OF OPERATIONS
10
Comparison of the sixteen weeks ended April 5, 2008 to the sixteen weeks ended March 31, 2007
NET SALES
|
|
|
|
|
|
|
|
|
|
By Geographic Region
|
April 5, 2008
|
|
March 31, 2007
|
|
% change
|
|
U.S. Sales
|
$
|
16,641,000
|
|
$
|
16,401,000
|
|
1.5%
|
|
Europe Sales
|
|
8,570,000
|
|
|
7,268,000
|
|
17.9%
|
|
Rest of World Sales
|
|
34,000
|
|
|
229,000
|
|
(85.2%)
|
|
Net Sales
|
$
|
25,245,000
|
|
$
|
23,898,000
|
|
5.6%
|
|
|
|
|
|
|
|
|
|
|
|
April 5, 2008
|
|
March 31, 2007
|
|
% change
|
|
Existing products
|
$
|
19,333,000
|
|
$
|
18,253,000
|
|
5.9%
|
|
New products
|
|
5,912,000
|
|
|
5,645,000
|
|
4.7%
|
|
Net Sales
|
$
|
25,245,000
|
|
$
|
23,898,000
|
|
5.6%
|
|
|
|
|
|
|
|
|
|
|
By Channel
|
April 5, 2008
|
|
March 31, 2007
|
|
% change
|
|
On Board Services
|
$
|
6,139,000
|
|
$
|
5,319,000
|
|
15.4%
|
|
Food Service
|
|
4,316,000
|
|
|
4,102,000
|
|
5.2%
|
|
Retail
|
|
5,789,000
|
|
|
7,104,000
|
|
(18.2%)
|
|
Military
|
|
5,862,000
|
|
|
5,086,000
|
|
15.3%
|
|
National Restaurant Chain
|
|
3,139,000
|
|
|
2,287,000
|
|
35.4%
|
|
Net Sales
|
$
|
25,245,000
|
|
$
|
23,898,000
|
|
5.6%
|
Our net sales of $25,245,000 for the third quarter of fiscal year 2008 increased $1,347,000, or 5.6%, over the third quarter of fiscal year 2007 sales of $23,898,000. We do not have any defined segments since all of our products are produced similarly despite the sales channel or area of distribution. Our new product sales of $5,912,000 for the third quarter of fiscal year 2008, increased $267,000, or 4.7%, over the third quarter of fiscal year 2007 new product sales of $5,645,000. These new product sales are defined as sales during the first year of introduction.
For the third quarter of fiscal year 2008 we had gains in four of our five sales channels. Our National Restaurant Chain sales of $3,139,000 for the third quarter of fiscal year 2008 increased 852,000, or 35.4% over the third quarter of fiscal 2007 sales of $2,287,000, which reflects our continued product acceptance in larger chain restaurants. Our On Board Services sales of $6,139,000 increased $820,000, or 15.4% over the third quarter of fiscal year 2007sales of $5,319,000, which reflects sales to additional new airlines and continued expansion in existing carriers. Military sales of $5,862,000 for the third quarter of fiscal year 2008 increased $762,000 or 15.3% over the third quarter of fiscal year 2007 sales of $5,086,000.. While there has been some restructuring in Military contracting, which slowed the growth Military sales in the second quarter of fiscal year 2008, we regained some of our business in the third quarter of fiscal year 2008. Our Food Service sales of $4,316,000 for the third quarter of fiscal year 2008 increased $214,000 or 5.2% over the third quarter of fiscal year 2007 sales of $4,102,000 due primarily from increased revenues from hotel banqueting. Retail sales decreased 18.2% from $7,104,000 in the third quarter of fiscal year 2007 to $5,789,000 in the third quarter of fiscal year 2008, which is due primarily to reduced promotions for our products in Costco. While we consider new products and channel information helpful to the reader we cannot forecast any particular trends for our sales as a result of such information. Our sales development cycle can run over one year in certain markets before recognizing a sale.
GROSS MARGIN
The gross margin decreased during the third quarter of fiscal year 2008 to 19.6% compared to 21.1% in the same period during the prior year. This margin reduction was primarily attributable to higher raw materials costs, fuel surcharges, continued increases in facility expansion and increased costs associated with new product introductions. We have completed price increases through all the sales channels but with continued rising costs it may be necessary to raise prices further. In addition, our France plant incurred some operational expense increases as compared to the prior year period. Our French operation is under close review by management and is undergoing some changes to
11
improve operations, purchasing and development. We expect that these changes will be effected during the fourth quarter of fiscal year 2008 and we believe that such changes will improve margins by the end of the first quarter of fiscal year 2009.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses for the third quarter of fiscal year 2008 increased $30,000, or 10.3%, to $320,000 from the third quarter of fiscal year 2007 expenses of $290,000. Most of the research and development costs are incurred well before an actual sale and the cycle can last over one year in certain markets. The expense increase is primarily related to increased salaries for additional staff.
SELLING AND MARKETING EXPENSES
Our selling and marketing teams are focused on customers primarily in the U.S. and Europe. Expenses for the third quarter of fiscal year 2008 increased $73,000, or 3.1%, to $2,451,000 from the third quarter of fiscal year 2007 expenses of $2,378,000 (selling and marketing expenses represented 9.7% and 10.0% of revenue for the third quarters of fiscal years 2008 and 2007, respectively). This increase was primarily related to increased consulting fees of $306,000 offset by decreased in store demonstration costs of $112,000, reclassification of certain costs to general and administrative expenses of $25,000.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the third quarter of fiscal year 2008 increased $1,194,000, or 68.2%, to $2,946,000, from the third quarter of the prior fiscal year 2007 expenses of $1,752,000 (general and administrative expenses represented 11.7% and 7.3% of revenue for the third quarters of fiscal 2008 and 2007, respectively). This increase was primarily due to costs associated with personnel reductions in our French operations totaling $590,000, additional staff and salary increases of $275,000, bad debt increase of $150,000, increases in public company expenses of $107,000 and reclassification of certain costs from selling and marketing expenses of $25,000.
NON-OPERATING INCOME AND EXPENSE
Non-operating expenses decreased to $8,000 for the third quarter of fiscal year 2008 from $18,000 in the third quarter of fiscal year 2007. This decrease is due primarily to the increase in Other income from consulting and some sous-vide training outside of Europe offset by interest expense of $149,000 related to the increased outstanding borrowings in the U.S. and France.
(LOSS) INCOME BEFORE INCOME TAXES
(Loss) Income before income taxes in the third quarter of fiscal year 2008 of ($774,000) decreased substantially from the third quarter fiscal year 2007 income of $609,000, or a decrease of 227.1%. This decrease was primarily related to lower gross margin percentages, principally from higher raw material costs resulting in approximately a $505,000 decrease in margins as well as higher general and administrative due to the costs associated with personnel reductions in France of $590,000.
INCOME TAXES
We recorded a benefit for income taxes of $364,000 and $7,889,000 for the third quarter of fiscal years 2008 and 2007, respectively. Our effective income tax rate for the third quarter of fiscal year 2008 was computed to be 47.0% as compared to 0.25% for the third quarter of fiscal year 2007, which was based on minimum tax payments and a full reversal of our valuation allowance on our net deferred tax assets of $7,900,000.
NET (LOSS) INCOME
Net loss of $410,000 for the third quarter of fiscal year 2008 decreased $9,024,000 from $8,614,000 in the third quarter of fiscal year 2007. The primary reason for the decrease was lower gross margin, higher general and administrative and research and development expenses offset by a prior year reversal of a $7,900,000 valuation allowance reserve related to income taxes.
12
Comparison of the
forty weeks ended April 5, 2008 to the forty weeks ended March 31, 2007
NET SALES
|
|
|
|
|
|
|
|
|
|
By Geographic Region
|
April 5, 2008
|
|
March 31, 2007
|
|
% change
|
|
U.S. Sales
|
$
|
43,932,000
|
|
$
|
42,708,000
|
|
2.9%
|
|
Europe Sales
|
|
22,169,000
|
|
|
18,362,000
|
|
20.7%
|
|
Rest of World Sales
|
|
362,000
|
|
|
282,000
|
|
28.3%
|
|
Net Sales
|
$
|
66,463,000
|
|
$
|
61,352,000
|
|
8.3%
|
|
|
|
|
|
|
|
|
|
|
|
April 5, 2008
|
|
March 31, 2007
|
|
% change
|
|
Existing products
|
$
|
52,938,000
|
|
$
|
48,129,000
|
|
10.0%
|
|
New products
|
|
13,525,000
|
|
|
13,223,000
|
|
2.3%
|
|
Net Sales
|
$
|
66,463,000
|
|
$
|
61,352,000
|
|
8.3%
|
|
|
|
|
|
|
|
|
|
|
By Channel
|
April 5, 2008
|
|
March 31, 2007
|
|
% change
|
|
On Board Services
|
$
|
18,108,000
|
|
$
|
14,081,000
|
|
28.6%
|
|
Food Service
|
|
10,943,000
|
|
|
10,196,000
|
|
7.3%
|
|
Retail
|
|
17,701,000
|
|
|
19,593,000
|
|
(9.5%)
|
|
Military
|
|
12,881,000
|
|
|
13,585,000
|
|
(5.2%)
|
|
National Restaurant Chain
|
|
6,830,000
|
|
|
3,897,000
|
|
73.9%
|
|
Net Sales
|
$
|
66,463,000
|
|
$
|
61,352,000
|
|
8.3%
|
Our net sales of $66,463,000 for the first three quarters of fiscal year 2008 increased $5,111,000, or 8.3%, over the first three quarters of fiscal year 2007 sales of $61,352,000. We do not have any defined segments since all of our products are produced similarly despite the sales channel or area of distribution. Our new product sales of $13,525,000 in the first three quarters of fiscal year 2008 increased $202,000, or 2.3%, over the first three quarters of fiscal year 2007 new product sales of $13,223,000. These new product sales are defined as sales during the first year of introduction.
For the first three quarters of fiscal year 2008 we had gains in three of our five channels. Our National Restaurant Chain sales of $6,830,000 for the first three quarters of fiscal 2008 increased $2,933,000, or 73.9%, over the first three quarters of fiscal 2007 sales of $3,897,000, reflecting continued product acceptance in larger chain restaurants. Our On Board Services sales of $18,108,000 for the first three quarters of fiscal year 2008 increased $4,027,000, or 28.6%, over the first three quarters of fiscal year 2007 sales of $14,081,000, which reflects sales to additional new airlines and continued expansion in existing carriers. Our Food Service sales of $10,943,000 for the third quarter of fiscal year 2008 increased $747,000 or 7.3%, over the first three quarters of fiscal year 2007 sales of $10,196,000 due primarily from increased revenues from hotel banqueting. Retail sales decreased 9.5% from $19,593,000 in the first three quarters of fiscal 2007 to $17,701,000 in the first three quarters of fiscal 2008, which is due primarily to reduced promotions for our products in Costco. Military sales decreased 5.2% from $13,585,000 in the first three quarters of fiscal 2007 to $12,881,000 in the first three quarters of fiscal 2008, which is due primarily to some restructuring in Military contracting. While we consider new products and channel information helpful to the reader we cannot forecast any particular trends for our sales as a result of such information. Our sales development cycle can run over one year in certain markets before recognizing a sale.
GROSS MARGIN
The gross margin decreased during the first three quarters of fiscal year 2008 to 20.0%, compared to 22.8% in the prior year. This margin reduction was primarily attributable to higher raw materials costs, fuel surcharges, continued increases in facility expansion and increased costs associated with new product introductions. We have completed price increases through all the sales channels but with continued rising costs it may be necessary to raise prices further. In addition, our France plant incurred some operational expense increases as compared to the prior year period. Our French operation is under close review by management and is undergoing some changes to improve operations, purchasing and development. We expect that these changes will be effected during the fourth quarter of
13
fiscal year 2008 and we believe that such changes will improve margins by the end of first quarter of fiscal year 2009.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses for the first three quarters of fiscal year 2008 increased $172,000, or 26.6%, to $819,000 from the first three quarters of fiscal year 2007 expenses of $647,000. Most of the research and development costs are incurred well before an actual sale and the cycle can last over one year in certain markets. The expense increase is primarily related to increased salaries for additional staff.
SELLING AND MARKETING EXPENSES
Our selling and marketing teams are focused on customers primarily in the U.S. and Europe. Expenses for the first three quarters of fiscal year 2008 increased $233,000, or3.8%, to $6,300,000 over the first three quarters of fiscal year 2007 expenses of $6,067,000 (selling and marketing expenses represented 9.5% and 9.9% of revenue for the first three quarters of fiscal years 2008 and 2007, respectively). This increase was primarily related to increased promotional expenses related to the rugby world cup of $201,000, salaries of $128,000, consulting expenses of $390,000, reclassification of certain costs to general and administrative expenses of $93,000, partially offset by a reduction in costs associated with in-store demonstrations of $237,000.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the first three quarters of fiscal year 2008 increased $2,049,000, or 46.9%, to $6,421,000 over the first three quarters of prior fiscal year 2007 expenses of $4,372,000 (general and administrative expenses represented 9.7% and 7.1% of revenue for the first three quarters of fiscal 2008 and 2007, respectively). This increase was primarily due to layoffs in our French operation totaling $590,000, salaries and benefits from additional staff and salary expenses of $342,000, public company expenses of $185,000, bad debt increase of $183,000, reclassification of certain costs to selling and marketing expenses of $93,000, financing charges of $110,000, information technology expenses of $93,000, rent expenses of $55,000 and broker fees $62,000.
NON-OPERATING INCOME AND EXPENSE
Non-operating expenses increased to $147,000 for the first three quarters of fiscal year 2008 from $141,000 in the first three quarters of fiscal year 2007. This decrease is due primarily to the increase in Other income from consulting and some sous-vide training outside of Europe offset by interest expense of $149,000 relating to the increased outstanding borrowings in the U.S. and France.
(LOSS) INCOME BEFORE INCOME TAXES
Loss before income taxes in the first three quarters of fiscal year 2008 of $385,000 decreased substantially (114.9%) from income before income taxes of $2,772,000 for the first three quarters of fiscal year 2007. This decrease was primarily related to lower gross margin percentages, principally from higher raw material costs resulting in approximately a $1,525,000 decrease in margins as well as higher general and administrative, selling and marketing and research and development expenses.
INCOME TAXES
We recorded a benefit for income taxes of $207,000 and $7,879,000 for the first three quarters of fiscal years 2008 and 2007, respectively. Our effective income tax rate for the first three quarters of fiscal year 2008 was computed to be 53.8% as compared to 284.2% for the first three quarters of fiscal year 2007, which was based on minimum tax payments and a full valuation allowance on our deferred tax assets.
In June 2006, the FASB issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109
(“FIN 48”). FIN 48 addresses uncertainty in tax positions recognized in a company’s financial statements and stipulates a recognition threshold and measurement of a tax position taken or expected to be taken in a tax return. We adopted FIN 48 on July 1, 2007 and the effect of applying the provisions of this interpretation was not material.
14
NET (LOSS) INCOME
Net loss of $178,000 for the first three quarters fiscal year 2008 decreased $10,945,000 from $10,767,000 in the first three quarters of fiscal year 2007. The primary reason for the decrease was lower gross margin and increases in research and development, sales and marketing, general and administrative expenses and income taxes.
15
LIQUIDITY AND CAPITAL RESOURCES
Selected financial ratios for the forty weeks ended April 5, 2008 and March 31, 2007 were as follows:
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April 5,
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March 31,
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|
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2008
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|
2007
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|
Liquidity Ratios
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|
|
|
|
|
Current ratio
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|
1.91
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|
1.72
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|
Receivables turnover
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|
15.2
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16.7
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Days sales in receivables
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|
34.3
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42.6
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Inventory turnover
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|
8.1
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|
8.5
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Days sales in inventory
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70.4
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75.9
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Leverage Ratio
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Long-term debt to equity
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25.9%
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|
18.9%
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Operating Ratios
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|
|
|
|
|
Return on investment
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-0.7%
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|
43.7%
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Return on assets
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-0.4%
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24.0%
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Cash, cash equivalents and short-term marketable securities were $209,000 at the end of the third quarter of fiscal year 2008 compared to $546,000 at the end of fiscal year 2007.
During the first three quarters of fiscal year 2008, cash generated by operating activities was $1,309,000, compared to a usage of $472,000 in the first three quarters of fiscal year 2007. The increase in cash generated by operating activities was primarily due to changes in working capital: decreases in inventory of $2,138,000 and increases in accounts payable and accrued expenses of $247,000, which were partially offset by increases in accounts receivable of $1,797,000.
Cash used in investing activities was $2,041,000 in the first three quarters of fiscal year 2008, compared to $3,340,000 in the first three quarters of fiscal year 2007. The decrease was due primarily to the completion of expansion activities at the U.S. facility. Projected capital expenditures for fiscal year 2008 are estimated to be between $3,000,000 and $5,000,000.
Cash provided by financing activities was $299,000 in the first three quarters of fiscal year 2008, compared to $2,889,000 in the first three quarters of fiscal year 2007. Our line of credit now sweeps automatically and debt proceeds are not individual transactions as in the past. Our lines of credit total over $2,000,000 with a variable interest rate between 4.95% and 5.5%,
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
Our significant contractual obligations as of April 5, 2008 were for debt, asset retirement obligations and capital and operating leases. Debt by year of maturity and future rental payments under operating lease agreements as of April 5, 2008 are presented below and there were no material changes during the first two quarters of fiscal year 2008. We have not engaged in off-balance sheet financing, commodity contract trading or significant related party transactions.
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Payments Due by Period
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Contractual Obligations
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Total
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Less than
1 year
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1 - 3 years
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4 - 5 years
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More than
5 years
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Debt payable – current
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$
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2,953,000
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$
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2,953,000
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$
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—
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$
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—
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$
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—
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Debt payable – long term
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5,772,000
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—
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2,358,000
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1,369,000
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|
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2,045,000
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Capital leases
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27,000
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8,000
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13,000
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6,000
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—
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Operating leases
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4,347,000
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776,000
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1,284,000
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1,176,000
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|
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1,111,000
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Interest
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838,000
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208,000
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307,000
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147,000
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176,000
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Total
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$
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13,937,000
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$
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3,945,000
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$
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3,962,000
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$
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2,698,000
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$
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3,332,000
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16
Assuming that there are no significant changes to our business plan, management also anticipates generating positive cash flow from operations during fiscal year 2008. Management believes that the combination of cash on hand, cash flows from operations and available credit facilities will provide sufficient liquidity to meet our ongoing cash requirements for the foreseeable future.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Derivative Financial Instruments.
We do not hold or issue derivative financial instruments for trading purposes.
Interest Rate Exposure.
Based on our overall interest rate exposure during the first three quarters of fiscal year 2008 and assuming similar interest rate volatility in the future, a near-term (12 months) change in interest rates would not materially affect our consolidated financial position, results of operation or cash flows.
Foreign Currency Exchange Exposure.
Our revenue, expense and capital purchasing activities are primarily transacted in U.S. dollars. We have one foreign operation that exposes us to translation risk when the local currency financial statements are translated to U.S. dollars. Since changes in translation risk are reported as adjustments to stockholders' equity, a 10% change in the foreign exchange rate would not have a material effect on our financial position, results of operation or cash flows. For the first three quarters of fiscal year 2008, a 10% change in the foreign exchange rate would have increased or decreased our consolidated net income by approximately $72,000.
ITEM 4.
CONTROLS AND PROCEDURES
Our management evaluated, with the participation of our principal executive officer and our principal financial officer, the effectiveness of the disclosure controls and procedures as of the end of the period covered by this quarterly report. Based on that evaluation, the principal executive officer and principal financial officer concluded that our disclosure controls and procedures, as defined in Rule 13a-15(e) under the Exchange Act, are effective to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the SEC.
There have been no changes in our internal control over financial reporting that occurred during the quarter ended April 5, 2008 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Our management, including our Chief Executive Officer and Chief Financial Officer, do not expect that our disclosure controls and procedures will prevent all errors and fraud. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives. Further, the design of a control system must reflect the fact that there are resource constraints and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management’s override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
17
CUISINE SOLUTIONS, INC.
PART II: OTHER INFORMATION
ITEM 1.
LEGAL PROCEEDINGS.
Neither we, nor our subsidiary are currently subject to any material legal proceeding, nor, to our knowledge, is any material legal proceeding threatened against us or our subsidiary.
ITEM 1A.
RISK FACTORS.
Our business is subject to certain risks and events that, if they occur, could adversely affect our financial condition and results of operations and the trading price of our stock. For a discussion of these risks, please refer to the “Risk Factors” section of our Annual Report on Form 10-K for the fiscal year ended June 30, 2007 filed by us with the SEC on September 21, 2007 and our Quarterly Report on Form 10-Q for the quarter ended December 15, 2007 filed by us with the SEC on January 24, 2008.
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5.
OTHER INFORMATION
On February 7, 2008, our Board of Directors approved amended and restated bylaws of the Company in order to, among other things, impose certain advance notice requirements that must be met for nominations of persons for election to the board of directors and the proposal of business to be considered by stockholders.
ITEM 6.
EXHIBITS
See the exhibit index.
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
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CUISINE SOLUTIONS, INC.
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May 14, 2008
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By:
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/s/ Ronald Zilkowski
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Ronald Zilkowski
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Chief Financial Officer, Treasurer and
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Corporate Secretary
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19
EXHIBIT INDEX
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Exhibit
Number
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Description
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3.1
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Second Amended and Restated Certificate of Incorporation, incorporated by reference to Exhibit 3.1 of the Registrant’s Current Report on Form 8-K, filed on October 31, 2007.
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3. 2
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Amended and Restated Bylaws of Cuisine Solutions, Inc., incorporated by reference to Exhibit 3.1 of the Registrant’s Current Report on Form 8-K, filed on February 14, 2008.
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31.1
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Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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31.2
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Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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32.1
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Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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________________
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20
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